Causes And Implications: Conservatism Research Essay

Question:

Discuss about the Causes and Implications for Conservatism Research.

Answer:

Introduction:

The analysis of the cash flow statements of the business organizations provides greater assistance in ascertaining the total amount of cash outflow as well as cash inflow in the business organizations. The following discussion sheds light in each item in the cash flow statements of CSR Limited, Australia.

Cash Flow from Operating Activities: As per the 2017 Annual Report of CSR Limited, there are five major items under the cash flow from operating activities. They are receipts from customers; payment to suppliers and employees; receive of dividends and distributions; interest received and the payment of income tax (Heinrichs et al., 2013).

Receipts from the customers refer to the money that CSR Limited receives from their credit sales. As per the cash flow statement, an increase in this item can be seen in 2017 as compared to 2016; that is $2726 million from $2499.5 million (csr.com.au, 2018). Increase in credit sales is the main reason for this increase. Payment to the suppliers refers to the money that CSR Limited is required to pay for the credit purchase of building materials. At the same time, the company has to make payment for the salaries of their employees for their business operations. An increase in this can outflow is there in 2017 as compared to the past year; that is $2424.6 million as compared to $2246.4 million. Increase in purchase as well as increase in the number of employees is the main reason for this increase. The next item is the dividend that CSR Limited has received from their investment in other company. Increase in this amount can be seen that is $14.2 million in 2017 as compared to $11.2 million in 2016. However, decrease can be seen in the cash inflow from interest received that is $1.9 million in 2017 and $2.5 million in 2016; and decrease in CSR Limited’s investment is the main reason for this decrease (csr.com.au, 2018). As per the cash flow statement, there has been major increase in the payment for income tax by CSR Limited due to the increase in their profitability; that is $52.7 million in 2017 as compared to 14.6 million in 2016.

Cash Flow from Investing Activities: Under this head, CSR Limited has registered five major items. They are purchase and proceeds from the sales of property, plant and equipment with other assets; purchase of businesses or controlled entities; acquisition costs and the repayment of loans and receivables taken in advance (Heinrichs et al., 2013).

From the cash flow statement of CSR Limited, it can be seen that the company has reduced the investment in purchasing property, plant and equipment along with other assets in the 2017 as compared to the past year; that is -$92.2 million as compared to -$120.0 million in 2016 (csr.com.au, 2018). The presence of adequate amount of assets is the main reason for this decrease in purchase. On the other hand, decrease in the proceeds from the sale of these asses can be seen in the year 2017 as compared to 2016; that is $44.7 million from 71.2 million. In the year 2016, CSR Limited did not do any major acquisition of business and massive decrease in this expenses is the proof of this fact; that is $3.5 million in 2017 from $12.8 million in 2016. Due to the decreased amount of acquisition, there is decrease in the costs related to this acquisition in 2016; that is -$3.4 million in 2017 as compared to $12.8 million in 2016. In addition, it can also be seen that CSR Limited has made large repayment of the taken advanced loans in the year 2017; that is -$5.3 million in 2017 from $0.1 million in 2016 (csr.com.au, 2018).

Cash Flow from Financing Activities: CSR Limited has also recorded some major items under this head of cash flow. They are buy-back of shares, repayment of the borrowings, payment of dividend, shares acquisition, payment of interest and other finance cost and transactions with the non-controlling interests (Collins Hribar & Tian, 2014).

Buy-back of shares refers to the process of repurchasing the shares. The 2017 cash flow statement of CSR Limited shows that the company has increased the buy-back of shares in 2017 as compared to the past year that is -$4.3 million from -$1.1 million. In the year 2017, CSR Limited has increased the drawdown of their borrowings from the payment of borrowings in 2016; that is $28.3 million in 2017 from -$10.4 million in 2016 (csr.com.au, 2018). Due to the increase in the profitability, CSR Limited has increased their dividend payment that is -$146.7 million in 2017 from -$144.9 million. In case of the acquisition of shares by the CSR employee share trust, decrease in this amount can be seen in the year 2017 as compared to 2016; that is -$5.4 million from -$7.1 million. There is a slight increase in the payment of interest and other costs that is $3.4 million and $3.2 million in 2017 and 2016 respectively. Lastly, in the year 2016, CSR Limited had to make the payment for transactions with the non-controlling interest for -$126.4 million where there was not any such payment in 2016 (csr.com.au, 2018).

The following figure shows the comparative analysis of the major heads of the cash flow statement of CSR Limited from 2015 to 2017:

It is evident from the above table that has been continuous increase in the cash inflow from the operating activities for CSR Limited; that is $234.3 million, $252.2 million and $264.8 million in the years 2015, 2016 and 2017 respectively (csr.com.au, 2018). The main reason for the increase in this head is the increase in the proceeds from the customers. At the same time, increase in interest received and dividend received can also be held responsible for this increase.

In case of the cash outflow from investing activities, it can be observed that the cash outflow increased in the year 2016 as compared to 2015; that is -$80.8 million in 2016 as compared to -$45.4 million in 2015 (csr.com.au, 2018). In the year 2016, CSR Limited made huge purchase of property, plant equipment that contributed towards this increase in cash outflow. However, in the year 2017, CSR Limited has been to decrease this cash outflow that is $60.7 million as compared to $80.8 million. Decrease in the purchase of these assets can be held responsible for this decrease in cash outflow (csr.com.au, 2018).

In case of the cash flow from financing activities, an increasing trend can be seen in this cash outflow from 2015 to 2017; that is -$126.8 million in 2015, -$166.7 million in2016 and -$257.9 million in 2017 (csr.com.au, 2018). It can be observed that CSR Limited increased the payment of dividend over these three years along with the repayment of borrowings. These reasons are responsible for this increase in cash outflow under this head to cash flow.

Other Comprehensive Income Statement Analysis

As per the 2017 Statement of Comprehensive Income, CSR Limited has reported some specific items. They are recognition of hedge profit or loss in equity, transfer of hedge profit to the statement of financial performance, different of exchange in the foreign operations translations, change in the fair value of cash flow reserve and income tax benefits related to these items (csr.com.au, 2018).

The following discussion provides understanding about the above-mentioned items in the other comprehensive income statement:

The main aim behind the use of foreign currency translation reserve is the conversion of the results of the foreign subsidiaries of the parent company to the currency in which the business organization carries out their financial reporting. This aspect makes it as one of the major parts in the process of consolidation in which the determination of the foreign currency of the cross-border company is done into the currency in which financial reporting is carried out. The next process involves in the re-measurement of the foreign currency into the reporting currency. The main reason for this is the recording of the profit or loss in the reporting currency (Ito & Kochiyama, 2014).

The main aim behind the use of cash flow hedge reserve is to plan the removal or minimization of the developed exposure due to the major changes in the assets and liabilities position of the business organizations. Change in some specific risks has major contribution behind this like interest rate risk, interest on debt risk and others (Deol & Nazari, 2013).

In this aspect, it needs to be mentioned that the companies are required to impose taxation on the above-discussed factors in the other comprehensive income statement. The companies can gain tax benefits from these aspects (Deol, 2013).

Other comprehensive income statement provides the diversified view of the profitability of the businesses. The main motive for CSR Limited to develop the other comprehensive income statement is to provide the users with the required information about the above-discussed aspects. With the help of this statement, the business organizations can provide a holistic and transparent picture of these items. These reasons are not directly involved in the generation of income (Amorim, 2014). Thus, for all these reasons, CSR Limited does not report all these items in the income statement or profit and loss statement.

Accounting for Corporate Income Tax Analysis

It is the obligation on CSR Limited to carry out their taxation accounting as per the regulations of Australian taxation law. For the year 2017 and 2016, the applicable tax rate of CSR Limited was 30%. According to the 2017 Statement of Financial Performance, the reported income tax expenses for the company in 2017 and 2016 are $61.7 million and $64.4 million respectively (csr.com.au, 2018).

The analysis of the taxation accounting of CSR Limited shows difference between the reported income tax expense and actual income tax expenses for the company. The company has some specific reasons that contribute to this difference. Share of net profit of joint venture entities is that first factors due to the fact that the extra payment of tax was on this were adjusted with the taxation expenses (Gale, Samwick & Center, 2014). Non-taxable profit on the disposal property is another reason for this difference as the extra payment of tax on this sale was adjusted with the actual tax expenses. The under payment and the overpayment of the income tax in the year 2016 and 2015 is another reason for the difference as CSR Limited had to pay the deficit amount of income tax along with gaining benefit from the over payment of income tax.

The 2017 Annual Report of CSR Limited shows the reporting of both the deferred tax assets and liabilities. As per the annual report, the reported deferred tax assets by CSR Limited for the years 2017 and 2016 are $201.2 million and $239.3 million respectively. CSR Limited did not have any deferred tax liabilities in 2017; and $20.9 million is the deferred tax liabilities of CSR Limited in 2016 (csr.com.au, 2018). The main reason for CSR Limited for the recording of deferred tax assets is the payment of advance tax by the company as the excess amount of paid tax than the actual taxation expenses is considered as assets. On the other hand, CSR Limited had to pay less amount of depreciation due to the difference in the rulings of income statement and taxable income statement. Thus, the deficit amount of depreciation is considered as liability.

As per the 2017 Annual Report of CSR Limited, the amounts of reported current tax expenses of the company for the year 2017 and 2016 are 0.5 million for both of the years. On the other hand, the reported current tax liabilities of CSR Limited in 2017 and 2016 are $10.3 million and $38.1 million respectively (csr.com.au, 2018). Thus, difference can be seen for income tax expenses and income tax payable. Income tax expenses of CSR Limited includes all the taxation related expenses of the company like current tax expenses, deferred tax expenses and current tax payable. Thus, income tax payable is a major part of the income tax expenses of CSR Limited and it can happen that the company might not pay the whole expenses under income tax. This is the major reason for the difference (Harding, 2013).

As per the financial statements of CSR Limited, the reported income tax expense in the income statement is $61.7 million and $64.4 million in 2017 and 2016 respectively. On the other hand, the reported income tax expenses in cash flow statement for 2017 and 2016 are $52.7 million and $14.6 million respectively (csr.com.au, 2018). Thus, clear difference in evident in the situation. It needs to be mentioned that the reported income tax expenses in the income statement is the tax expenses for the current year of the company; and the company is required to pay it in the next year. However, the income tax payment in cash flow statement includes the payment of income tax for the previous; it can also include the advance payment of the income tax. For this reason, difference can be seen in the income tax expenses from income statement and cash flow statement.

The above discussion indicates towards the fact that there are not any surprising or confusing factors in the taxation treatment of CSR Limited as the company has provided all the required justification and clarification of their taxation treatment in the notes to the financial statements. In addition, the users do not face difficulties in understand the taxation testament of CSR Limited as the companies has complied with all the standards and regulations of Australian taxation law. Most importantly, one can gain insight about the treatment of deferred tax assets and liabilities along with the treatment of the current tax payable from observing the taxation operations of CSR Limited.

References

Amorim, C. F. (2014). Reporting comprehensive income: Evidence from Portuguese listed companies (Doctoral dissertation, NSBE-UNL).

Annual Meetings and Reports. (2018). Corporate. Retrieved 22 May 2018, from

Collins, D. W., Hribar, P., & Tian, X. S. (2014). Cash flow asymmetry: Causes and implications for conditional conservatism research. Journal of Accounting and Economics, 58(2-3), 173-200.

Deol, H. (2013). Analysts’ Earnings Forecasts and Other Comprehensive Income.

Deol, H., & Nazari, J. A. (2013). The Decision Usefulness of Comprehensive Income Reporting: Evidence from Canada.

Gale, W. G., Samwick, A. A., & Center, U. B. T. P. (2014). Effects of income tax changes on economic growth. Economic Studies, brookings. edu/wpcontent/uploads/2016/06/09_Effects_Income_Tax_Changes_Economic_Growth_Gale_Sa mwick. pdf.

Harding, M. (2013). Taxation of dividend, interest, and capital gain income.

Heinrichs, N., Hess, D., Homburg, C., Lorenz, M., & Sievers, S. (2013). Extended dividend, cash flow, and residual income valuation models: Accounting for deviations from ideal conditions. Contemporary Accounting Research, 30(1), 42-79.

Ito, K., & Kochiyama, T. (2014). Does comprehensive income influence dividends? Empirical evidence from Japan. In International Perspectives on Accounting and Corporate Behavior (pp. 107-125). Springer, Tokyo.

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